Good morning, this is Paul Donovan, Chief Economist at GBS Global Wealth Management. It's 7 o'clock in the morning London time on Friday the 8th of May. There's quite a lot to occupy investors' attention today.
To begin with, the armchair generals of the financial markets will be watching developments in the Gulf, where Iran launched attacks on US naval vessels and on the United Arab Emirates, and the US launched airstrikes on Iran. US President Trump says the ceasefire is still in place. The Washington Post reports that the US CIA believe the Iranian government will avoid more significant damage to their economy for three or four months at least, and that the Iranians still have around three quarters of their pre-war stock of missile launchers and 70% of their pre-war missile stockpile.
This highlights again a key problem for financial markets. The damage to the United States is fairly obvious. Gasoline prices keep on rising with associated political pressures.
But the resilience of the Iranian government is very hard to gauge. If this reporting is accurate, there would seem to be much less urgency for Iran to do a deal with the United States, meaning either the United States has to compromise even further, or the Strait of Hormuz remains closed for longer than markets are currently pricing. In a different theatre of war, Trump set a deadline of the 4th of July for the US to implement a trade deal with the United States.
This is an extension of the previous deadline, and markets are not likely to place too much emphasis on it. Such deadlines are often extended or just ignored or forgotten. Trump is threatening to increase tariffs that US consumers would have to pay for buying European products, but the general tariff threat has also been blunted, with a US trade court ruling the 10% global tariffs – Section 122 tariffs – are illegal, albeit that this ruling only applies to the specific companies in the lawsuit and Washington State, the plaintiffs in the case.
It is estimated that US importers paid around $8 billion under these tariffs during the month of March, so if they are overall declared illegal, there will be fiscal considerations, albeit the tariff revenue is relatively minor compared to the increase in defence spending arising from the war. Meanwhile, German exports grew during March, against expectations for a decline. We have the April US employment report today.
This has receded as a market focus because employment will be one of the last things to be affected by the war. However, other factors have been affecting the labour force. Research from the National Bureau of Economic Research concluded that US workers have been more likely to leave the workforce, where ICE arrests of undocumented migrants has increased.
Simplistically, if there are no bricklayers in the construction supply chain because they have all been deported, citizens who work as roofers have nothing to put a roof on top of. Payrolls are expected to grow in April, but moderately. Revisions will need to be watched because the deteriorating quality of this data makes real-time information dubious.
Average earnings are also something of a focus. This is not the same thing as pay increases, and reducing lower-skilled employment will tend to raise average earnings without anyone earning any more money. Nonetheless, in dealing with the US affordability crisis, earnings give a sense of how much income can take the strain of higher prices, versus how much will be required from either a fiscal offset or further reductions in the household savings rate.
The US affordability crisis will get some focus from Michigan consumer sentiment data released today. Not that sentiment data itself is much use, but because there is an inflation expectation component in the numbers. These have very little relevance to actual inflation, and inflation expectations are a meaningless number economically, unless consumers change their behaviour in response to changing expectations.
Nonetheless, in judging the political pressures, including the pressures on Trump to end the war in the Gulf, the vibes that such surveys hint at might be considered relevant. That's all for today. Have a good day.
This material has been prepared and published by the Global Wealth Management Business of UBS Switzerland AG, regulated by FINMA in Switzerland. It's subsidiaries, or affiliates, collectively referred to as UBS. In the USA, UBS Financial Services Inc. is a subsidiary of UBS AG, and a member of FINRA SIPC.
The investment views have been prepared in accordance with legal requirements designed to promote the independence of investment research. This material is for your information only, and it is not intended as an offer or a solicitation of an offer to buy or sell any investment or other specific product. The analysis contained herein does not constitute a personal investment recommendation or take into account the particular investment objectives, investment strategies, financial situation and needs of any specific recipient.
This material may not be reproduced or copies circulated without prior authority of UBS. Please visit www.ubs.com forward slash CIO hyphen disclaimer to read the full legal disclaimer applicable to this material.